The Impact of Company Stock on Retirement Income

Employees may have good intentions when they invest their retirement savings in employer stock, but by not diversifying, they are actually reducing their potential future retirement income. This paper analyzes the effects of investing in a single small-cap or mid-cap stock versus investing in a well-diversified portfolio of large-cap stocks.

A hypothetical 65-year-old retiree who invests $210,000 of his retirement savings in a single small- or mid-cap company stock would expect to be able to withdraw only $5,500 in his first year of retirement (assuming a 90% chance of having enough money to fund a 30-year retirement). However, if he invests in a diversified large-cap portfolio, he would expect to be able to withdraw $13,500. This astounding gap of $8,000 is attributable to the idiosyncratic risk of single-stock investing, which, as shown, can be diversified away.

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How Company Stock Volatility May Impact Retirement Income